Google – Thrice bitten, never shy.

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Fourth time unlikely to be the charm.

• Google has announced a partnership with HTC that sees some key engineering talent join Google but it remains a complete mystery to me as to what Google is paying money for.
• This will represent the fourth major hardware related transaction that started with Motorola Mobility and continued with Nest and Dropcam.
• These deals all had two things in common.
  • First: All of the acquired companies have felt great discomfort being owned by a company that does not really understand hardware.
  • The result was infighting and a failure to use Google’s strengths to increase market share of the products in question.
  • Second: In each case the real beneficiaries of the transactions were the owners of the assets being sold, leaving Google shareholders considerably worse off.
• Even with highly hardware-experienced management, these assets have struggled to perform, leaving me with the impression that just being inside Google is enough to put good hardware people off their game.
• I think that the case with HTC will be a little different as Google is not buying the whole company but instead is paying for some IP and taking on some engineering talent.
• This is where I am left scratching my head as on my numbers, HTC’s smartphone assets currently have negative value.
• One possibility is that Google is simply pre-paying in order to guarantee capacity and resources such that the previous ramp-up problems that occurred with Pixel do not happen again.
• This will also provide the infrastructure and distribution to produce Pixel smartphones in high volumes, something with which last year’s product really struggled.
• I do not think this deal is about promoting pure Android as Andy Rubin’s Essential Inc. is already pushing this button with great energy.
• Hence, I think that this is about bringing smartphone production and distribution to scale and if Google is prepared to be as aggressive on price as Xiaomi, it might just get somewhere.
• I think that the real risk to this transaction is once again Google’s culture which has made the other hardware acquisitions feel like unwanted orphans that have no business being part of Google.
• Google has yet to show any sign that it has learned from the mistakes but better late than never.
• I continue to be pretty ambivalent to Alphabet whose valuation has kept in step with the improvement of its revenues generated by mobile devices.
• Tencent, Baidu and Microsoft look more interesting to me.